Research links stronger investment returns with high ESG ratings

Have you considered making ESG (environmental, social, and governance) factors part of your investment plan, but worried it’d affect returns and your ability to reach your goals? New research suggests that the opposite could be true – that companies with higher ESG ratings might deliver stronger investment returns.

ESG investing means you consider environmental, social, and governance issues alongside financial information when deciding how to invest. Some investors view it as a way to use their wealth to have a positive effect on the world and communities while still benefiting financially.

ESG factors may cover a broad range of topics, from a company’s contribution to climate change to how they work with local communities.

While ESG investing has been growing over the last few decades, there’s a common misconception that it means forgoing financial gains. Yet, research suggests that isn’t the case.

“ESG leaders” delivered average annual returns of 12.9% between 2013 and 2021

The ESG and Global Investor Returns Study from Kroll looked at the relationship between historical returns of more than 13,000 publicly traded companies across a variety of locations and industries and their ESG rating.

Overall, the study found that companies with better ESG ratings outperformed those with lower ratings between 2013 and 2021.

Indeed, companies deemed “ESG leaders” delivered average annual returns of 12.9%. In contrast, those categorised as “laggard companies” delivered average annual returns of 8.6%. This trend was reflected consistently across all major geographical regions and for most industries, although, consumer staples and healthcare were exceptions.

So, the myth that ESG investing means you miss out on investment returns doesn’t ring true in this case.

If you’re interested in ESG investing but have been worried about the effect it might have on your investment performance, the study results might give you the confidence to look at ESG investing more closely.

However, you should keep in mind that investment returns cannot be guaranteed. Historical data that correlates strong ESG ratings with higher returns doesn’t automatically mean you should invest in those companies – you still need to assess what’s right for you.

Interestingly, the research also revealed that European companies tend to be further along their ESG journey than counterparts in other parts of the world. Almost a third of the companies assessed in western Europe are rated as ESG leaders, compared to 10% in North America and 6% in Asia.

So, ESG investors could find their investment opportunities might be limited in some parts of the world.

Funds with an ESG focus could provide a way to invest with ESG factors in mind

For many investors, funds provide a simple way to invest in a wide range of assets.

When you invest in a fund, your money is pooled with that of other investors and invested in a way that aligns with the fund’s criteria. This usually means your money is spread across multiple assets and helps to diversify your investments.

Some funds have an ESG focus and, if you want to make ESG factors part of your investment strategy, could be right for you.

One of the challenges of ESG investing is that there’s no clear definition of what “ethical” or ”green” investing looks like. So, a fund that’s labelled ESG might not align with your personal views.

Clearly defining what areas are important to you could help you identify funds that might suit your needs. For example, would you want to invest in companies that operate in the fossil fuel industry? Or would you like to invest in companies that are tackling some of the world’s biggest social challenges?

Keep in mind that you may have to compromise when choosing a fund, so setting out key areas you’d like to focus on might be useful.

Assessing your risk profile is still important when making ESG investment decisions

While the data suggests that ESG investing could deliver greater investment returns, assessing opportunities with your risk profile and personal circumstances in mind is still crucial. Just because an investment is labelled “ESG” and has performed well in the past doesn’t automatically mean it’s right for you.

Contact us if you’d like to talk about ESG investing

If you’re interested in learning more about ESG investing and making it part of your strategy, please contact us. We could work with you to assess which opportunities could align with your values and long-term investment goals.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.